Enforcing Liquidated Damages Clauses Part 1
Liquidated damages clauses are used to protect one party in the event that another party breaches the contract. In the construction industry, disputes like this usually arise from project delays. An example of this would be a contractor failing to complete a project as scheduled. The resulting effect is a stalled project and an owner left with major financial losses. For the owner, a the clause will recover the damages associated with the breach. In order to recover damages due to a contract breach, we recommend you contact an experienced Orlando construction lawyer to draft your contract.
This two-part article will provide an overview of liquidated damages. In Part 2, we will wrap up the article with ways to ensure the clause is enforceable.
Benefits of the Clause
Liquidated damages clauses are beneficial to parties in various ways. Both parties can know in advance what will happen in the event of a contract breach because the amount will be accurately calculated beforehand. This can also help each party plan accordingly and stick to deadlines. Since determining damages can be difficult, this clause takes the guesswork out of the compensation for damages after a breach. During the drafting of the contract, parties have the opportunity to negotiate and agree upon the figure which is a guarantee that the non-breaching party will not leave empty-handed. It is important to remember that, the non-breaching party will not have access to liquidated damages if they have directly contributed to the project delay.
Liquidated damages must be set beforehand and they must be reasonable. Reasonable means that the estimate you come up with must be based on realistic estimations. To ensure the set amount is reasonable you will use a fixed dollar amount or use a particular formula to form your estimation. In the event of a contract breach, the estimate must be deemed practical by a judge.